Mon December 10, 2012

Fiscal Cliff: Cutting the Untouchable?

This is TELL ME MORE from NPR News. I'm Michel Martin. Coming up, we'll hear about elections in Ghana. We'll talk about whether the election of President John Dramani Mahama to a new term confirms the country's reputation for leadership in democratic processes, or perhaps undermines it. That's later.

But first we check in, again, on the efforts in this country to get this country's economic house in order. President Obama is hitting the road again in campaign style appearances. That's an effort to strengthen his hand in negotiations with the Republicans over plans to cut the federal deficit. The president met with House Speaker John Boehner over the weekend.

They were talking, again, about that thing you've been hearing so much about - avoiding the so-called fiscal cliff. And as the deadline for reaching an agreement gets closer, we decided to talk about some of the big policy changes that are being talked about to get that deficit under control.

We want to focus on the kinds of things that have previously been considered untouchable, like defense spending and the mortgage interest deduction. We're going to look at those and ask why not. We're going to start with tax breaks - the mortgage interest deduction and tax breaks for charitable giving. With us now, NPR's Scott Horsley. He's been covering the negotiations in Washington D.C. He's here in our studios in Washington.

Also with us, Dorothy Brown, a law professor at Emory University. She joins us from WABE in Atlanta. Thank you both so much for joining us.

SCOTT HORSLEY, BYLINE: Good to be with you.

DOROTHY BROWN: Thank you.

MARTIN: So Scott, I'm going to start with you. The main argument for eliminating the deductions is to bring in extra tax revenues. So how much money are we talking about - either capping or getting rid of these deductions?

HORSLEY: That's right. Well, it could be considerable. I mean, all together we have about $1 trillion a year in spending through the tax code. So there's a lot of money potentially available. And the Tax Policy Center here in Washington has run some scenarios and said, well, what if you were, for example, to cap the pool of deductions that any one household could take at, say, $25,000?

That brings in about $1.2 trillion in additional revenue for the government over the course of a decade. If you raise the cap up to $50,000, so you could take $50,000 in deductions, over a decade you could raise about $750 billion. So there's a lot of money at stake there.

MARTIN: One of the arguments for deductions like this and for using the tax code in this way, is to encourage certain behavior.

HORSLEY: Right.

MARTIN: I mean, the argument is that the mortgage interest deduction was originally intended to encourage homeownership, something Americans seem to value very highly. And the charitable deduction is to encourage people to give money to charity. So why not eliminate these?

HORSLEY: You're exactly right. It's always easy to talk in the abstract about closing loopholes and getting rid of special interest tax breaks, but, you know, one man's loophole is another man's vital economic incentive. Sometimes, though, they do outlive their usefulness. There have been, for example, other countries that have phased out their mortgage interest deduction and the experience is that there's not as if there's a precipitous drop in homeownership.

Certainly, if you were to do away with the tax break for charitable contributions, people might give less. It's reasonable to assume, at least from the contributor's point of view, I may say I'm going to give $100 because I know my net cost of that is going to be less than $100. And of course, the wealthier you are, the bigger the tax break you get for that.

That's actually one of the criticisms for the way we do this now, is the people that get the biggest tax breaks are the wealthiest. The White House will often say, you know, if Bill Gates gives $1 million, he gets a larger tax break than you or I do when we give $100.

MARTIN: Dorothy Brown, these particular tax issues that we've identified here are the ones that are commonly identified as the ones that the middle class values the most. But I understand that you have a perspective on that.

BROWN: Yes. My perspective looks at the impact of tax policy on black and Latino tax payers and tax payers of color, white tax payers as well. The majority of blacks and the majority of Latinos don't own homes, so they're not benefiting from the mortgage interest deduction subsidy.

I also wanted to follow up on a point that Scott made talking about why we have the mortgage interest deduction and the tax law. Most economists agree nobody buys a home to get the benefit. Or put another way, the mortgage interest deduction does not encourage homeownership, even though people say it does.

If you compare our homeownership rates with Australia, Canada, countries that have no subsidies for homeownership, they're virtually identical.

MARTIN: We're talking with Professor Dorothy Brown from Emory University's School of Law and NPR's Scott Horsley. We're talking about arguments for and against limiting tax deductions as part of the fiscal cliff negotiations. So, I mean, isn't it so, sort of, commonly understood that they in a way don't have to talk about it?

I mean, it's just the kind of thing that when I see, sort of, ads for real estate agents and I see those flyers that real estate agents paper your neighborhood with, don't they always talk about this - particularly at the end of the year?

BROWN: There's a difference between knowing I get a tax break if I do something and doing it because I get the tax break. In effect, what the studies show is people would buy a home even without the tax break. That's the point of it doesn't encourage anyone to buy a home. Now, we did see this impact when there was a first time home buyer credit.

It affects timing. So people rushed to the market before that first time home buyer credit went away, but you don't have people buying homes, which is a very costly, expensive thing, just to get a tax break. You have to afford it. You have to be qualified for a mortgage. So it's not, oh, tax break. I've got to buy a house. It's not how it works.

MARTIN: And the other argument that I hear you making is that one thing that people don't tend to talk about is that it really does advantage different people differently.

BROWN: Yes.

MARTIN: That the focus has often been on the wealthy and the middle class. But you're saying even within the middle class...

BROWN: Yes.

MARTIN: ...there are lots of people who don't benefit.

BROWN: That's absolutely true.

MARTIN: Why is that?

BROWN: Part of it is because you only benefit from any of these deductions, whether it's mortgage interest or charitable, if you itemize. If you fill out that Schedule A and the amount is greater than the government-generated standard deduction, the flat amount that everybody gets.

So lots of homeowners don't get the benefit because they don't itemize. They take the standard deduction. So it really doesn't matter that they're spending money on mortgage interest as opposed to rent, which is not a deduction.

HORSLEY: Only about...

MARTIN: Scott.

HORSLEY: Only about 30 percent of tax payers across the country who file a tax return do take the trouble to itemize. Now, there are some people who are making a rational decision that even if I were to itemize I don't have enough deductions to overcome the standard deduction. I'm better off just making it easy. But the IRS is aware there are people who could benefit financially from itemizing, who don't.

But the IRS, for example, gets information on what people owe on their homes. They get information on charitable contributions. And there are certainly people in that 70 percent of tax payers who are not itemizing who could benefit from doing so. But the professor is exactly right, these tax breaks tend to flow mostly to the wealthiest people.

You know, because, A, they itemize more. B, they have more tax breaks to do. And because they're in higher tax brackets the value of those tax breaks is highest.

MARTIN: So, Professor Brown, the charitable deduction. I think it might be the oldest one on the books. It's been around since 1917. While it's certainly true that people are aware of big gifts by famous people like Bill Gates or Ted Turner...

BROWN: Right.

MARTIN: ...there are lots of people who, for example, for the area that we are in, in Washington D.C. at certain times of the year you see lots of fundraising appeals.

BROWN: Right.

MARTIN: From lots of organizations saying take advantage of this time of year to give money.

HORSLEY: We at public radio certainly know about this.

(LAUGHTER)

MARTIN: We might. We might have mentioned it a couple of times. But non-profits and a lot of educational institutions are very worried about this because they think that people factor it in. They'll say, well, I can go to this school because the tuition is X but I can also supplement the tuition by giving a charitable donation of Y and it comes out, you know, in my favor. Why not? You know, what's wrong with that?

BROWN: Well, I think the deduction should be repealed. At which point, you know, the president of Emory University probably seeks to remove me from my position. I'm just joking. But...

MARTIN: But why do you think it should be repealed? Because lots of Americans think of themselves as very generous people. Lots of people give money to charity.

BROWN: And lots of people give money to charity without getting a tax break. So I go back to Scott's point and the IRS statistics that show two-thirds of Americans do not itemize deductions. Low-income taxpayers give money to charity and do not get a tax break for it. People are charitable. They're going to give money without a tax break, but there's studies out there, at least one study that I'm aware of that shows the highest income taxpayers are very sensitive to the tax rate, or put a different way, if tax rates are lower, than the richest Americans won't give as much. Well, that calls into question our motives for giving.

And do we want to subsidize that? Lots of people - lots of people, especially low income taxpayers, give money to charity all the time and do not get any tax break from it.

MARTIN: Scott Horsley, before we let you go in the time that we have left, we mentioned that one of the reasons we're talking about these particular things - they have been seen as untouchable, just too popular, too big to fail, as it were, too big to change. Is that still true?

HORSLEY: Well, I think it's certainly true that, if you start to touch them, they're going to be a lot of screaming. There's going to be a lot of lobbying. There'll be a dogfight here in Washington over it. But you are hearing serious people talk seriously, not necessarily about doing away with these tax breaks, but perhaps restructuring them.

The Center for American Progress came out this last week with this proposal to replace the deductions with a flat rate credit, so no matter what tax bracket you're in, you'll get the same credit. For lower income people that would be a net tax plus. For upper income people it would mean the value of the deductions would be a little bit less.

There have been other ways that you could skin the cat, but I think all these trillion dollars of tax breaks in the code is going to get a second look as we try to deal with our fiscal situation.

MARTIN: Well, why now? After all these years when these particular things were really considered untouchable, why now?

HORSLEY: One reason is, I think, policymakers here in Washington have realized just how much spending goes on through the tax code. Going back, really, to the '90s, there's been an awful lot of social policy that's been carried out via the tax code. I've talked to policymakers who've said for 20 years now if you want to carry out some kind of program in the government, you might never be able to get it passed if you billed it as a straight ahead spending program.

If we said we're going to give first time home buyers $5,000 to go out and make their down payment, you'd be laughed off the block in Congress, but if you say we're going to give you a $5,000 tax credit to do it, that's great. Republicans like tax credits. They think of it as lower taxes. Democrats like whatever the social program might be. So an awful lot of social policy has been carried out via the tax code, and spending through the tax code has just multiplied.

BROWN: And you don't have to vote on it every year. If it's in the tax code, it stays in the tax code and nobody has an annual appropriations issue.

MARTIN: Dorothy Brown is a law professor at Emory University. She was kind enough to join us from WABE in Atlanta. Here in Washington, D.C. with me, NPR's Scott Horsley. Thank you both so much for joining us.